That India has a poor standing among its peers in tax-GDP ratio is a known fact. Of late, much has been written about the increasing share of indirect taxes in India’s revenue collections, which suggests a return of regressive element in revenue mobilisation strategy.
The Organisation for Economic Cooperation and Development (OECD) released its fourth economic survey of India on Tuesday. The document gives some interesting insights into India’s tax policy vis-à-vis its peers.
First of all, India’s dependence on indirect taxes is much higher than the OECD average or other emerging market economies.
This bit is more or less known. Normally, it is assumed that India’s low income tax base is to blame for poor share of income tax in total revenue receipts. However, the OECD shows that India’s income tax slabs are not as progressive as they are made out to be. India’s top tax rate becomes applicable only at very high levels of income, i.e. at around 1,200% of the average wage in the organized sector, which is much higher than the level in its peer countries.
The OECD recommends increasing the number of taxpayers by keeping basic exemption thresholds for personal income tax constant in nominal terms for several years. Besides, tax incentives which primarily benefit the rich, like those related to housing investment, should also be reconsidered. The report also advocated raising more revenue by taxing property and wealth.
While income tax slabs are not as progressive as they are thought to be in India, corporate taxation structure actually seems to be regressive. This is because bigger companies are better able to exploit the rules and regulations and hence enjoy relatively lower effective tax rates. Meanwhile, corporate income tax rate (CIT) in India is already high compared to many other major economies and tax revenue collected in the form of CIT is comparable to other countries.
The OECD report endorsed the government’s recent efforts to gradually move towards a uniform 25% CIT from the current 30% CIT.
Moving towards a uniform corporate tax rate by eliminating incentives and schemes is unlikely to be an easy task and would face opposition from organized lobbying, according to an Economic and Political Weekly article by Kavita Rao of the National Institute of Public Finance and Policy (New Delhi). She argues that in most sectors a sizeable share of firms pay less than 25% of effective tax, the apparent target tax rate that the government is working towards, although the share of firms paying more than 25% effective tax is gradually increasing.
Nevertheless, many of the sectors that are the prime beneficiaries of the current system, viz. chemicals, transport, financial and business services, mining and electronics, are reportedly “fairly articulate sectors”. Rao concludes that “the struggles of the government to implement the proposed tax regime might indeed be considerable”.
Most of the coverage around the OECD survey was focused on its comments on India being the fastest growing economy and potential positive impact of demonetisation. Its discussion on revenue generation methods perhaps offer more food for thought.